We will now begin the question and answer portion of the call. Our first question comes from Peter Winter from DA Davidson. Peter, your line is open.

Thanks. Good morning. I wanted to start on the morning. I wanted to start on the margin. You know, the outlook for the second half of the year assumes no rate changes. But can you talk about how you're positioned if we do get one or two rate hikes. And then second, on page nine of the presentation, you mentioned that due to competitive pressures, it could pressure the margin. And then if you could just elaborate on that, and is that contemplated in the margin guidance for the second half of this year?

Sure. Maybe I'll take a quick shot. This is Pat. It's the impact of rate hikes. So when we combined the organization, we absorbed Flushing's liability sensitivity with our relative neutrality on interest rates. It was just kind of the shape of where the balance sheets were in respect. We added hedges to that that kind of brought us back into a more neutral rate position. So we're modeling something that's modestly liability sensitive. So a rate hike would be very modestly Deluded, if you will, to revenue. I'd say that from a 25 basis point rate hike on an annual basis would be about a $5 million pre-tax impact to revenues. Conversely, if we got a rate cut, which nobody's modeling, but if we did, because of our modest liability sensitivity, that would be about a $4 million a year run rate. So we remain relatively neutral. I think as important, if not more so, is what happens at the belly of the curve and what happens with five-year and ten-year rates for new originations and renewals, because I think most people would agree that we're at fairly elevated levels for those. We like the shape of the curve, so if there's a parallel increase in the curve, we're kind of indifferent to rate hikes or cuts. And then second part of your question was competitive pressure. I think that's just a continuous pressure on pricing for new loans, particularly the kind of loans that we're considering. So both bank and non-bank pressures are keeping spreads on new loans at pretty historically tight levels. Joe, do you want to add to that?

I think it's a fair statement. We've seen an increase. and a focus on our construction business, which tends to have better margins. So I think as you've seen in the latest quarter, the average yield is pushing 670, 672, which I think is indicative of us focusing on construction and CNI versus permanent CRE loans.

Got it. If I can ask on credit, Any guidance maybe you can provide with regards to net charge-offs or provision expense in the back half of this year? And then also, in the press release, it mentioned a $21 million commercial relationship that went non-performing, and then two commercial relationships for $56 million that went to criticize. Just any details on those loans?

I guess I'll give you just some sense on net charge-offs. I think as the company gets...

We are experiencing...

I can hear you. Apologies for the brief technical delay. Peter, are you still there?

I am. You started with net charge-offs, and then I lost you.

Sorry about that. So if you think about net charge-offs, I mean, historically, both Ocean First and Flushing had, you know, close to, I mean, five basis points and zero charge-offs in any given quarter. I think it's our business shifts to more C&I lending. You're going to see that it won't be unusual to have charge-offs from quarter to quarter, but I don't think there's going to be a material impact on profitability. Slightly higher than our historical performance, but nothing that would stand out or be unusual, and probably still well at or below the peer group levels of net charge-offs. I'm sorry, Peter, your second question was on the criticized loan. Let me just ask Joe to cover that for you.

Yeah, Peter, on the $21 million loan, the bank and the borrower have a plan in place. We believe we're well secure. We have updated appraisals, and I expect that that will resolve itself before the end of the year, either through an upgrade or a refinance. were well informed on our large borrowers.

Okay, it broke up, Joe, on your end, I think.

One moment for technical difficulties, please.

Operator, we're just checking to make sure the backup line is working.

Yes, the backup line has been staged. Please ensure to mute all other lines and microphones in the room and proceed.

Okay. Sorry for that interruption again, Peter. I think we were on the classified mode. I just want you to take that from the top again and walk through that.

Right, so he has started with the $21 million commercial.

Yeah, so the $21 million CRE loan, we have a plan in place, the borrower and the bank. We expect that that will be resolved before the end of the year, either through an upgrade or a refinance. And then on the other assets you referenced and criticized, downgrades come and go quarter over quarter. We're well aware of what we need to do on both sides of the house, and we remain pretty confident and I'll leave it at that.

Okay. And then just one quick housekeeping. You mentioned with the expense guidance for the third quarter, there's the one-time expense associated with the new digital banking platform. How much is that?

It's not significant. It's probably $2 million.

Got it. Okay. Thanks for taking the questions.

We just want to demonstrate that we're continuing funding our ongoing platform investments out of our core run rate, which still is hovering kind of at the 70-ish million a quarter range.

Got it. Thanks, Pat.

Our next question comes from the line of David Bishop with Hufti Group. David, your line is open.

Yeah, thank you. Good morning, gentlemen. Hey, quick, quick follow up on the net interest margin in terms of the guidance. Do you think that's going to be mostly driven from earning asset yield improvement or still room to move on the deposit side or maybe a combination of both? Just curious how you see that that rise sort of occurring.

It's definitely both. opportunities to improve our funding base and even bigger opportunities with Flushing's funding base as we move forward and kind of redeploy some of the extra liquidity that we have today. So there's really good opportunity on the funding side. On the yield side, I think it kind of depends on the mix and competitive pressures. So the more construction and small business that we do, the better. from a straight yield perspective. CNI, which carries with it a lot of other opportunities and self-funding, obviously has super tight spreads and is probably the most competitive space right now.

Got it. And in terms of the multifamily loans sold there, just curious, is there still sort of a banking relationship with those customers or is that and completely divested.

That's a great question, Dave. No, we actually sorted out the primary relationships in that and retained loans for that exact reason. So we retained loans where we had primary relationships and strong deposit profiles. Those customers typically had pretty strong cash flows. So that's one of the ways we kind of split out what we wanted to keep and what we wanted to move away from. So we don't think that'll have any impact on the other areas of the bank. but for the most part, the loans that we sold were lending only relationships.

Got it. Appreciate the color.

All right. Thanks, Dave.

Our next question comes from the line of Daniel Tamayo with Raymond James. Daniel, your line is open.

Thank you. Good morning, guys. I guess maybe just to go back to the margin, I apologize for being a dead horse here. So you reiterated the guidance for the 320 margin in 2027 post-merger there. And I guess, can you give us your deposit cost assumptions underlying that margin in 2027? It just seems like Most banks are talking about, and you guys mentioned as well, like competition being pretty stiff right now on the funding side. And I think a lot of banks are talking about the funding costs bottoming. I get you guys have the flushing funding base to integrate, but just curious how that plays out. Maybe there's some color on the flushing, some of the components that how you can lower that, but just trying to get fill in the gap between maybe funding costs going down where others are saying they're bottoming or maybe even moving up.

I think on both sides, Danny, it's Chris Maher. Both sides, you're going to see a little bit more of a mixed shift than you are kind of environmental trends. So both on the loan side, as Joe mentioned, kind of beefing up. Historically, Ocean First has done a nice job around construction. So we have an opportunity to do a little more of that moving with the extra balance sheet from Flushing. And then on the deposit side, a mixed shift around products. So the pressure you see out in the markets, and others have talked about, is out there. You know, CDs cost a fair amount. But we're talking about bringing down the level of brokerage. We're talking about optimizing pricing in the government deposit base, particularly in New York. The New York government deposit base costs a fair amount more than the New Jersey government deposit base. So we see some tactical opportunities there, but think mixed And as you saw, we had a nice increase in non-interest bearing this quarter. Flushing's done a nice job historically over the last several quarters around non-interest. So kind of leaning into that new branch network and doing a little bit of a mix shift.

All right. Thanks for that, Chris. So I guess next, just On the expenses, I want to make sure I understand the guidance. So I think you said it was $2 million for the digital banking, the one-timers within the guy that you put out there, Pat. So as we think about kind of back half of the year, is the way to think about that just taking $2 million off of the $110 to $115? Or just from a kind of run rate end of the year number, like is it $108 to $113 in the fourth quarter? And then that's a good number to grow off of?

I'd rather think of expenses as a good number to shrink off of as we exit this year because just remember that the majority of our cost saves are only just kicking in in the fourth quarter because of our system conversions that won't be fully completed until the end of the quarter. So there's some cost saves that occur, but the biggest chunk of those will start in the fourth quarter and then there's continued opportunities to further rationalize vendors as we move into next year. So I would hope that we're on a glide path to continue to bring it down a little bit, even in the face of inflationary pressures, and see us with a run rate that's closer to 100 than 110 as we start out the year.

A good way to think about the expense momentum is in Q3, we had some employee separations related to the initial consolidation in the merger. but as we get into Q4, the systems conversion is likely to happen in September. It's been our practice to keep most of the staff within the bank for at least a month afterwards to make sure that the customer experience is exactly what we want it to be. So you'll see staff departures in earnest at the end of October, which will benefit the fourth quarter a bit, but that will help even more in the first quarter of 27. Okay.

I mean, how should we think about the amount of cost saves left in the first quarter? And is the first quarter then the kind of the first clean quarter that we should build on? Or is even 27 you're hoping to take it down from that first quarter number?

The first 27 will be the first clean quarter, but we think there are opportunities to improve operating leverage throughout the year. So even if that means just kind of holding expenses flat or down a little bit, and avoiding what would be typically the inflationary increase in first quarter is going to go through merit increases and that kind of stuff. And then you'll see we're planning for more significant growth in loans and deposits in 27. So if you're holding expenses flat or coming down a little bit, the operating leverage could really build up by the end of 27.

Okay, great. Thanks for all the color, Chris. Appreciate it.

Our next question comes from the line of Christopher Maranac with Breen Capital. Christopher, your line is open.

Christopher Maranac Hey, thanks. Good morning, Chris and Pat and team. We've wanted to have a large reserve for a long time, so you're finally here. I guess my question is, should we think of this as a permanent change, number one, and number two, is the extra tangible book dilution something that we can kind of make up for relatively quickly?

Yes, I think the, you know, we see a lot of earnings momentum going into 27, so I think you'll be building back tangible book value as you go throughout the year. And then one thing I just want to point out, and Pat mentioned this in his comments, if you think about the source of the tangible book value dilution, the most significant individual line item is the build in the ACL. So we moved what was in the equity account over into the ACL account, which provides for a much stronger balance sheet and more consistent ACL coverage with our peer group, but it's not like that money was, you know, left the company in any way. It's just a stronger ACL. So that was about, if you think about it in dollar terms, that was about $80 million of net reserve build on top of the reserves that both Flushing and Ocean First had coming into the quarter. So that was the most significant line item, and we certainly don't expect that that's lost content. And the second biggest item is the purchase accounting marks, which will come back to us and accrete into income over the next couple of years. So because of the sources of the dilution, we were a little less concerned about that. But we do expect earnings to pick up nicely in 27 and start to build that tangible book back.

Great. Well, thank you for that background, and thanks for hosting us this morning. All right.

Thank you.

Our next question comes from the line of Emily Lee with KBW. Emily, your line is open.

Hey, everyone. This is Emily stepping in for Tim Switzer. Thanks for taking my question. So given the progress made in commercial banking initiatives and the recruitment of some revenue producing talent over the last few years and Your commentary on remaining opportunistic on the hiring front. Can you maybe dive deeper into any incremental investments you plan to make in that area?

I guess one thing I would say, Emily, is that if you think about the company as we go into the recruiting season is typically heaviest in Q1 because your best commercial bankers have, you know, typically they're having a good year and they like to collect their bonuses from where they are and then move on. So So we expect the hiring season really to be in Q1. We have already seen an uptick in interest from qualified commercial bankers who really like first the coverage in New York that we got from Flushing. So we're talking to commercial bankers in New York that wouldn't, I think, have considered us as strong an opportunity as they did in the past. And then there's just the dynamics of having a larger balance sheet, bigger capital base. So players from larger banks, which is typically our recruiting base, would feel more comfortable coming to a firm of the size we are now. So I think we've got, we will be a more attractive destination for talent in the first quarter. At this point, we don't expect any significant increase in expenses because we think that we can self-fund a lot of this through technology initiatives and through kind of the rotation of how we spend our money instead of spending a net extra. But, you know, we'll keep everybody posted. And if we have good news in the first half of next year, we're able to hire more bankers than we thought, we'll certainly give you updated guidance.

That's really helpful. Thank you. And then just on capital, following the completion of the flushing acquisition, can you discuss your capital priorities going forward? You know, what level of repurchases should we anticipate going forward? And do you have any appetite for further bank M&A, maybe in 2027 or beyond?

So the priorities are pretty straightforward. I mean, our best priority is always organic growth. And so we hope to be able to use the capital we expect to accrete in organic growth next year. So that's the biggest priority. But we're always very discriminating about the credits we put on and the spreads and managing our margin. So if we don't find the right quality of growth and we wind up with an excess capital position, our number one priority would be buybacks. And that's it. We're heads down focused on the franchise right now. We're not talking about M&A.

Great. Well, thanks for taking my questions. Congrats on the quarter.

Thank you.

Our next question comes from the line of Matthew Brees with Stevens Inc. Matthew, your line is open.

Hey, good morning.

Good morning, Matt.

I was hoping we could start with, you know, maybe overall balance sheet size kind of, you know, thoughts and guidance. And I guess I'm most curious about the interplay between loan growth and securities from here. You know, should we be thinking there's, you know, like a one-for-one offset, you know, securities into loans, basically maintaining a flat balance sheet? And if that is the case, how long do you anticipate that dynamic going on for?

Oh, that's a good question, Matt. So if you were to kind of go back a step, we did inflate to a degree the amount of securities in the balance sheet when we did the loan sale. Curiously, we were able to buy securities at a lower risk weight that had a higher yield than the loans that we sold. So it wound up being a very good trade. As we go forward, we're probably a little heavy in securities, so we'd pull that down a little bit. But we do want to maintain a pretty good liquidity position. We think that's one of the most important things we achieved this quarter. in terms of making sure we had on hand liquidity, a lower loan to deposit ratio and all that. So the first place we would go is pulling down securities a little bit. So I think you'll see a flattish balance sheet this year. And then to the extent you'll see any growth, it would probably be coming in 27. But after we've kind of massaged the securities number a little bit.

I guess my follow up there is, does that balance sheet outlook Is that what's giving you the flexibility and the opportunity to kind of test run higher cost community deposits, maybe work offs from broker deposits and lower deposit costs? I think the spot cost at the end of the quarter is 226, right? About 20 bps higher. Is that what's providing you the room to kind of lower that from current levels and see where it goes?

Absolutely. That's the chief advantage of having that excess liquidity in the lower loan to deposit ratio. So we don't have to be as kind of careful. We don't have to match the market every day. But I will say that to give you longer term guidance, we think being more liquid, all things equal, makes us a more valuable franchise. So you might see loan to deposit tick up a little bit, but you still think of it as staying below 95%. As opposed to in the past, we would have been closer to 100%. But we will use that advantage in the way we think about pricing.

And I will add, Matt, this is Pat, that there's probably 300 or 400 million of securities where we parked them just because the yields were better than leaving them in cash. We'll look to recycle those and maybe some cash flows into better yielding opportunities as they come up. Most of that will probably, hopefully be done this quarter, in the third quarter. But we didn't have much time and we wanted to put all the cash to work as fast as we could. So there'll be some churn there, but it shouldn't affect the overall magnitude of the portfolio or the mix of loans versus securities.

Okay. I do want to come back to that, but just one more on kind of balance sheet mix. You know, what is the strategy with the remaining sub amount of rent regulated multifamily? Is that saleable at similar marks? Is that something you intend to do, or is that more of a work down over time through maturities and payoffs? Also curious, same question line, if there's anything else within the flushing kind of loan portfolio that we should think of as running off or getting rid of on an expedited basis?

I would consider that asset class to be in a runoff posture, so we expect that it's going to decline slowly over the next probably 8 to 12 quarters. I will make the point that those were pretty good loans. We had loans to deposit customers. We had loans there that might have had an interest rate swap or a participant position. It just made them less liquid. You really couldn't sell them into a capital markets execution. But strong debt service, very low LTVs, delinquencies, de minimis. We're happy to have those clients and just let that kind of resolve itself over time. That said, we recognize that there's a public policy risk to the asset class, so we've got a 14.5% credit reserve against them, so we've marked them pretty aggressively. But it's small. It's going to run off, and we'll just kind of see that happening slowly over probably two to three years.

And I would say these aren't bad assets to hang on to. So these are 50% LTVs, 140 debt service coverage, 5.5% average yield. of what we're left with. They were just not as easily securitizable, so they weren't as fast to sell at as high a price because of that feature, which is why they didn't go into an even larger pool of sale that we did in June.

I think your second question, Matt, about other assets, I think we're done with the balance sheet restructure. This is kind of where we are. It's kind of a clean July 1st balance sheet to then move off of and were focused on organically growing that as we outlined earlier.

Okay. And then my last one, going back to the NIM, let's just assume that the 226 deposit costs might be down a little bit. It still implies that there's quite a bit of moving pieces on the earning asset side to get to that third quarter range. Can you just help me out? with your expectations for kind of loan yield. And obviously there's accretion that impacts that. And Pat, you had mentioned some movement of securities portfolio. Could you just give us some idea of where yields on those two components will shake out that's kind of supporting the NIM range for the third quarter? And that's all I have. Thank you.

One thing I'd point out is that just like the deposit spot costs, on the loan side, we only had one month worth of purchase accounting accretion on the loan side. So you're gonna see a little bit of an offset there as we experience a full quarter's worth of kind of mark on that loan portfolio. So that'll be helpful in terms of bringing the loan yields up. But Pat?

Yeah, probably the biggest driver of that is the full quarter's worth of accretion, moving it up. So we had about $8 million of accretion in second quarter, net interest income, and we'll have 16, 17 million as we move into the next quarter. on a runway basis.

Okay. Okay. I'll leave it there. Thank you very much. I know I asked a lot. Thank you.

Thanks, Matt.

Our next question comes from the line of Manuel Navas with Piper Sandler. Manuel, your line is open.

Staying on the balance sheet for a moment, can you talk about the hedging strategy a bit? Flushing was liability sensitive. What are you putting on? And how long is it termed out for? Does it contemplate you shifting your own funding base to eventually not need that in the future? Just kind of talk through that a bit, please.

Pat walk you through the duration and all that. But you think about philosophically, you know, we want to run a reasonably balanced shop. We were pretty neutral prior to the acquisition, as Pat mentioned, made us liability sensitive. So what we were focused on with the hedges is more of the tail risk, like outside the normal operating environment, because the normal plus or minus 100 basis points really doesn't move the number much for us. But what you would have seen if you looked at our interest rate risk models without the hedges, you would have seen more risk going in the kind of plus 200, plus 300, plus 400, and minus two, three and 400. So it was really an exercise around limiting our longer term risk. You might talk about the duration and our return to the more neutral position over time.

Sure, so yeah, and the hedges that we did put on were essentially caps and collars, as Chris mentioned, just to hedge against spikes, larger increases in rates, about 1.3 billion that ranged out over CISA CISSP CISA CISSP Our goal would be to continue to have a relatively neutral balance sheet because predicting short-term rates has proven to be very difficult. Predicting long-term rates has proven to be very difficult. So we feel like staying short is the way to go. From a duration perspective, we've ticked up our duration modestly with the acquisition and we're probably in the four to five range on the asset side. CISA CISSP and the securities duration is ticked up along with the loans. So they're both in that range on the liability side. For the most part, we remain quite short.

That's helpful. Can I shift to kind of loan growth drivers It seems like the, just kind of walk through the loan portfolio, places where you might see continued runoff. There's a comment of resi's running off. But also you have a lot of legacy momentum in the commercial side. If you could just talk about go forward loan growth makes a bit, and when does the flushing team kind of add even more to it?

I'll make a couple comments. I'm sure Joe will add in as well. So some of the momentum is just by adding the commercial bankers, as Joe talked about, new bankers, new relationships. As we've seen in other times when we've made acquisitions, we think hopefully a meaningful opportunity in the flushing base to become a bigger part of many of these clients' wallet share. So just by nature of the size of the balance sheet and loan limits and things like that, we've already met just a wonderful group of long-term flushing clients who can do more with us than they could with Flushing. And I think that that could be a meaningful driver over the next several quarters. But, Joe, anything you'd add?

I'd add two things. One, typically when you do these, there's a little bit of a lull just because clients are trying to assess the combined entity. And quite frankly, some of your salespeople are as well. But as Chris mentioned, we've got a pretty good positive outcome pretty early on. We've done a variety of customer events and days in market. which I think have been really valuable for us and the client base. And the combined scale I think is really going to make a difference. And remember, the vast majority of the flushing book was smaller Cree transactions. They had a fledgling C&I business. So the opportunity to do things at a larger scale with a little bit more boots on the ground and some sophistication I think is going to really It's one of the densest markets in the country.

And individual portfolios, you have some expected runoff in residential. You talked about the rent regulated is going to run off slowly. Where are some of the headwinds?

Those are certainly headwinds, but I think the guidance we gave you around growth in 27 would be net of those headwinds. So that's kind of where we would be. I'd also note that we think our win percentage in New York is going to go up. So as you recall, we entered New York in 2019. We had five branches, a $2 billion franchise. We were doing well and winning clients. But adding the 30 branches and the visibility of that we think is going to be very helpful. I mentioned in my comments that we will rebrand the flushing branches. That will be done by October 1st. and one of the reasons you see a slight elevation in expenses in Q4 is we expect to do a significant kind of brand launch in New York that we hope provide a little more visibility and credibility so the win percentage in New York we think is going to be better in 27 than it was in 26 because people will just know us better, feel more comfortable. It's hard to pin down, but there's a comfort level people get when they drive by your branches even if they never walk through them.

That makes sense. My final one is, obviously, 1% ROA next year isn't the final target. With things closed now, what are kind of your thoughts on how you can exit 27 with a trajectory to a better ROA and the best way to accomplish that?

So, I mean, I think long-term ROA targets, the minimum floor for us would be more like a 120. because if you don't get to that level, look, our capital levels are going to remain reasonably range-bound. So you're not going to get to your cost of capital unless you're somewhere up in that area or better. So I think in 27, it's to not just get to a 1 but get above a 1, exit the year strong, and then look towards that target in 28.

Executing on cost saves, more substantial loan growth, getting a 320 NIM, any other pieces to that better trajectory?

I think if we do those things, it all holds together. We think that over time as the balance sheet grows, we would get non-interest expenses closer to a range of like 175 basis points, 1.75%. So you couple that with a 320 margin, and you're doing pretty well.

Thank you for the commentary.

Thank you.

Our next question comes from the line of Matthew Breese with Stevens, Inc. Matthew, your line is open. Just a quick follow-up point of clarification.

Pat, I think you had said $8 million in accretable yield this quarter. The press release says net accretion was closer to, I don't know, 1.1, 1.2 million. I was modeling like four and a half, five million next quarter. I think you were referring just to the loan side. Maybe you could clarify.

Yeah, you're absolutely right. It was about a million in June, one month. That will be about five million in the third quarter. And it's driven off in part off of loan maturities. It'll drop down a little bit, three million-ish, maybe a little under that in the Fourth quarter, so the full year impact for this year is a little over $8 million. That will double and will be $16, $17, $18 million per year for at least the next two to three years. That's what we're expecting. Okay. That's it. I'll leave it there. Thank you. Sorry for the misspoke.

That's all right. Appreciate it.

We have reached the end of our Q&A session. I will now turn the call back to Christopher for closing remarks.

Thank you. We appreciate your time today and your continued support of Ocean First Financial Corp. We look forward to speaking with you in October about our third quarter results and we'll provide an update in our merger integration at that point too. Thanks very much. Enjoy the rest of your summer.

This concludes today's call. Thank you for attending. You may now disconnect.